An SBA 504 loan is an affordable loan option if you want to fund equipment or real estate purchases for your business. Also known as the CDC/504 loan, Certified Development Companies and other third-party lenders fund the loan. On the other hand, the United States Small Business Administration offers backing for the loan. This loan helps businesses to create more jobs and work on growth.
In this article, you will learn about the SBA loan program named 504 and how it works for businesses. Apart from that, we will also discuss some of the major features of this loan program for businesses. Finally, we will share with you how one can be eligible for the SBA 504 loan. Hence, to learn more, read on through to the end of the article.
What Is The SBA 504 Loan Program?
According to the official website of SBA,
“The 504 Loan Program provides long-term, fixed-rate financing for major fixed assets that promote business growth and job creation. 504 loans are available through Certified Development Companies (CDCs), SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by SBA.”
Additionally, with an SBA 504 loan, the maximum amount that you will get is $5.5 million. Apart from that, if you are dealing with energy projects, you can receive a 504 loan of up to $5.5 million for each project. However, you can only receive the loan for up to three projects. Hence, the amount must not exceed more than $16.5 million.
Essentially, these loans are a type of long-term loan that is available at a fixed rate. The United States SBA offers these loans. The focus behind these loans is to support the growth of small businesses and create more jobs. The CDC and other third-party lenders offer the loan to businesses. The SBA provides a guarantee for the loan. However, a borrower needs to have at least 10% equity to get the loan.
Apart from that, there are some eligibility requirements and terms on the way in which a borrower can use funds. However, once you get the SBA 504 loan, you will need to pay fees, interest, and other repayment terms.
How Does The SBA 504 Loan Work?
The loan program is chiefly for small businesses that are in need of fixed-rate financing. As a borrower, you can use the 504 loan to purchase assets for your business, including equipment and real estate. However, you might have to face restrictions on how you can use the funds. For example, you cannot use those funds for working capital.
According to Investopedia,
“SBA 504 loans are a financing solution for small business owners who want to purchase real estate or equipment. It can be a good option for small business owners who do not qualify for conventional financing. The U.S. Small Business Administration (SBA) backs the loans, but it does not provide the funds. CDCs, which are economic development nonprofits, work with banks and credit unions approved by the SBA to provide the funding.”
In a given loan, the CDC will provide 40% of the funding. Apart from that, a bank or credit union will offer 50% of the funds. Additionally, the borrower of the loan will be responsible for making the remaining 10% of the contribution. However, the contributions of the CDC and the borrower can change with the type of business of the borrower.
In this case, both the CDC and the bank or credit union have the backing of the SBA.
Who Is Eligible For The SBA 504 Loan?
There are certain eligibility criteria for availing of the SBA 504 loan. The following are the different eligibility criteria for SBA 504 loans:
- Your company must be a profit-making business.
- The company is based in the United States.
- The management of the business is experienced enough, and there is a feasible business plan for the business.
- There is no other available funding for the business.
- The business must be a small business (that is, a net worth less than $15 million).
- Your average net income is less than $5 million, excluding taxes for two years prior.
There are certain eligibility requirements, which you can see on the official. SBA website.
What Are The Main Features?
NerdWallet explains –
“SBA 504 loans can be used to buy land, real estate, equipment, machinery, furniture or fixtures. They can also be used to build or upgrade facilities, including utilities, streets, or parking lots. In specific scenarios, you can use a 504 loan to refinance debt or change ownership in your business. You cannot, however, use an SBA 504 loan for working capital, to purchase inventory, or to invest in real estate.”
The following are the major features of the SBA 504 loan:
1. The loan amount of the SBA 504 loan ranges from $25,000 to $5 million. Certain energy public policy projects can be eligible for up to $5.5 million.
2. The repayment term of the loan is long-term and can be 10, 20, or 25 years. However, it depends on the useful life of the financed property.
3. The rate of interest of the SBA 504 loan depends on the 10-year US Treasury notes. Generally, the rate is around 5% to 7%.
4. The property that you finance for the SBA 504 loan serves as the collateral for the loan. However, there are certain cases where the borrower will need to provide additional collateral.
5. There are loan fees for SBA, CDC, and third-party bodies. However, the fees can vary, and they are included in the total loan amount. Hence, the upfront cost, in most cases, is a 10% down payment.
6. Once you are eligible for the SBA 504 loan, you will get the loan within thirty to ninety days from the application date.
Wrapping Up
I hope this article was helpful for you in getting a better understanding of the SBA 504 loan and how it works. If you want to apply for this loan, consider visiting the official website of the SBA. However, make sure you are meeting all the eligibility requirements.
Do you have more information about this loan? Consider sharing them with us in the comments section below.
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